Hail Columbia!

Editor’s note: This article was adapted from the Winter 2013 issue of the Manhattan Institute’s City Journal.

The Washington, D.C., region has long been considered recession-proof, thanks to the remorseless expansion of the federal government in good times and bad. Yet it’s only now—as D.C. positively booms while most of the country remains in economic doldrums—that the scale of Washington’s prosperity is becoming clear. Over the past decade, the D.C. area has made stunning economic and demographic progress. Meanwhile, America’s current and former Second Cities, population-wise—Los Angeles and Chicago—are battered and fading in significance. Though Washington still isn’t their match in terms of population, it’s gaining on them in terms of economic power and national importance.

In fact, we’re witnessing the start of Washington’s emergence as America’s new Second City. Whether that’s a good thing for America is another question.

During the first decade of the twenty-first century, the Washington metropolitan area overachieved on a variety of measurements versus its peer metro areas—that is, the rest of the ten largest metros in the country, plus the San Francisco Bay Area. Among these regions, Washington ranked fourth in population growth from 2000 to 2010, trailing only the three Sunbelt boomtowns of Atlanta, Dallas, and Houston. Washington is currently the seventh most populous metropolitan area in America.

The region has performed even more impressively on the jobs front. Since 2001, Washington has enjoyed the lowest unemployment rate of its peer group. Over the course of the entire decade, it ranked second in job growth, trailing only Houston. That wasn’t just because of the federal agencies and gigantic contractors of Washington stereotype. The region has also been a hotbed of entrepreneurship—much of it, to be sure, dependent on federal dollars. During the 2000s, it had 385 firms named to the Inc. 500 lists of fastest-growing companies in America, according to Kauffman Foundation research—by far the most of any metro area. From 2000 through 2011, according to rankings developed by Praxis Strategy Group, Washington’s low-profile but powerful tech sector had the country’s second-highest job growth, after Seattle’s. The region is also one of America’s top life-sciences centers.

Then there’s economic output. During the 2000s, per-capita GDP grew faster in Washington than in any of its peer regions except the Bay Area. Today, Washington’s per-capita GDP is the country’s second-highest—again, after the Bay Area. Unlike Washington, however, the Bay Area hemorrhaged jobs over the course of the decade. Related to Washington’s impressive output is its astonishing median household income, the highest of any metro area with more than 1 million people. A remarkable seven of the ten highest-income counties in America are in metro Washington. And during the 2000s, per-capita income rose in Washington faster than in any of its peer metros.

Washington’s huge recent growth has brought its economic size much closer to Chicago’s—not just in per-capita terms but in absolute ones, too. Back in 2001, Chicago’s economy was 52 percent bigger than Washington’s; by the end of the decade, the gap had shrunk to 24 percent. Similarly, in 2000, total personal income was 62 percent greater in Chicago than in Washington—a difference that had dwindled to 31 percent by the end of 2010. The combined Washington-Baltimore area is now the fourth-largest in the country, with about a million fewer people than Chicago. In roughly 15 years, if current growth rates hold, Washington-Baltimore will pass the 10-million-person threshold necessary to be counted as a megacity.

Finally, Washington’s population is the best-educated in America. Almost half of all adults in the Washington region have college degrees, the highest proportion of any metro area with more than 1 million people. The same is true of graduate degrees: almost 23 percent of Washingtonians hold them. Chicago has just 16 percent more people with college degrees than Washington does. And Washington has more people with graduate degrees than Chicago does and is closing in on Los Angeles.

It isn’t just the Washington metropolitan region that’s thriving. The current boom is accomplishing something that previous ones didn’t: transforming the city itself, the District of Columbia. The District’s population grew during the 2000s for the first time since 1950. It suffers less from the problems that once tarnished its image: strained race relations, high crime, ineptly delivered public services, local financial crises. Many city services, such as planning and transportation, have been heavily professionalized and are even touted nationally as innovative models.

True, corruption, especially in real-estate deals, remains alive and well. A parade of local politicians, including current mayor Vincent Gray, is under a cloud, and even infamous former mayor Marion Barry is still around as a city council member. But with a torrent of investment, new residents, and prosperity flooding in, it hardly seems to matter. The District grew by more than 1,000 new residents per month between 2010 and 2011. It ended the 2011 fiscal year with a budget surplus of $240 million and the 2012 fiscal year with a surplus of $140 million. In the past, people put up with a dysfunctional city government so that they could be near the federal one. Today, by contrast, the District is a desirable place to live in its own right, much like Manhattan or San Francisco.

The Washington metro area is 26.4 percent black, Number Eight in the country among metros with more than a million people. Stereotypes of the city dwell on its black underclass and its history of electing black nationalist politicians like Barry. But the area has a large black middle class as well—above all, in Prince George’s County, just across the Maryland state line. That county is over 65 percent black, and its median household income is $70,700, making it the highest-income majority-black county in the United States. Immigrants, too, have been flourishing in Washington. By the end of 2010, nearly 22 percent of the metropolitan area’s population was foreign-born, up from 17.3 percent in 2000—the biggest increase among the ten largest American metro areas. The international origins of both talent and investment in Washington signal something new: it’s becoming an important global city.

But what solidifies Washington’s emerging status as America’s new Second City isn’t its economic performance or its emerging global-city profile. Both of those are secondary effects of the real change in Washington: the increasingly intrusive control of the federal government over American life.

Traditionally, Washington thrived through a “leaky bucket” model, redirecting some of the gigantic money flow through the federal pipeline to itself. The 2000s were an especially good time for the region, as two wars, plus 9/11-related defense and homeland-security procurement, fueled the boom. These days, about a third of the Washington-area economy depends on the federal government. But with $16 trillion in national debt and large deficits projected as far as the eye can see, the gravy train may be coming to a halt.

Yet Washington has discovered a new way to extract value from the federal government, based not just on spending but on an ever-expanding regulatory state. An array of programs—the Sarbanes-Oxley and Dodd-Frank acts governing finance; the government’s auto-industry takeover; the EPA’s declaration that carbon dioxide is a pollutant—takes regulation to new levels of detail and intrusiveness, even extending to the micromanagement of particular companies. The trend began long before President Obama took office, but its quintessence is Obamacare, an annexation by the federal government of one-sixth of the American economy via 2,000 pages of byzantine legislation, not counting the thousands of pages of implementing regulations still to come.

All this intrusion emanates from the legislative and especially the regulatory machinery in Washington. The city has become, in effect, the Brussels of America. So a wider and wider variety of businesses and organizations must be located there to lobby the government that decides their fate. These firms pay local taxes. So do their workers, who also buy houses, patronize stores, pay tuition at private schools, employ local doctors and lawyers, and so on. The regulatory superstate is turbocharging Washington’s local economy.

This new basis for prosperity could pay huge dividends to the region. The model here might be the defense industry, which has already centralized many operations in the area. Northrop Grumman, for example, recently moved its headquarters from Los Angeles to Washington. Boeing shifted its headquarters from Seattle to Chicago to be closer to defense operations and customers in Washington. Other industries, such as health insurance, may follow suit. Even if they don’t relocate to D.C., they’ll need to be represented there.

So Washington can boast demographic and economic growth, a highly educated workforce, an emerging elite-global-city profile, and regulatory hegemony that ensures that America will continue to pay it tribute, even if the federal government manages to restrain its spending. This looks like a winning recipe locally, and it gives the region a legitimate claim to be America’s new Second City.

But it’s a loser for America. The regulatory superstate depends on inflicting pain on the rest of the country, pain that only Washington itself can relieve—if you pay up and have the right connections, that is. Washington’s fortunes and America’s are increasingly at odds.